Zoom Communications, Inc. (ZM) Earnings Call Transcript & Summary

Hello. You had another addition of Goldman Sachs Communacopia and Technology Conference 2024. Third year, in a row. Thank you so much, Eric, for gracing the occasion and sharing your time with us. Really appreciate it. Why don't we jump right in. You're a visionary, you changed our lives. I have to acknowledge that again and again.

Thank you.

What do you see changing in the next 5 years? What do you want Zoom to be that nobody could have predicted 5 years ago, what Zoom would be like? Hard to make a prediction. But what are your goals? What do you want this company to achieve and accomplish 5 years from now?

Yes, Kash, thank you for having me. So time flies. I remember I was here last year as well. You look younger and younger every year. So I'm so jealous. So in terms of what's in the next 5 to 10 years, and I remember when we started, we were trying to build a better video conference solution. It's a very simple reason. I think the next 5 to 10 years, I think we really want to build an AI-first work platform. It's a much bigger reason. So no matter for the frontline workers or other workers or maybe engineers or support agent. We want to build something for them. It's actually just not a -- way more than just as we do conferencing. We monitor the UC and the CC solution. We're more than just the collaboration. It's AI first, worker platform. Essentially, we want to employees, no matter what they do. They can live within a Zoom worker platform to get it to work it done, I'll you give an example, right? What I mean, AI-first, let's see, I want to create our Q3 and Board deck for our Board for the meeting. Now the way it works, our finance team, our sales team, marketing team, they worked together, right, to create this slide. So down a little bit with AI-first worker platform, I can do that. I can call the Zoom AI companion agent, "Hey, I want to create the Q3 Board slide deck". And in the AI agent, we look at all the sources from a [ CRM ] for our financial back end in the system or the marketing system, any data sources will automatically created that slide deck. I can to look at that, added to that. I can't get work done, right? Just within a few minutes. I get the slide deck done, right? This is part of our worker platform. I think it will take some time to get it there, but I think that's the vision, and we are very, very excited. In terms of goals, I would say similar to what we did in our 1.0 journey, right, and do all we can to create value for our investors, for our customers and also for our employees. For those early investors who bet on Zoom, we give them a very good return, right? Same is true for our early adopters for those customers who deployed Zoom many years ago, right? And also the employees really like that. We want to achieve the same goal in our 2.0 journey in the next 5 to 10 years.

And that's fascinating that you want to be involved in the world of work as a professional, not just doing a conferencing.

Yes, it's a worker platform.

Yes. And if you look at the core competence of Zoom. How should we think about how the core competence of the company lends itself to where you want the company? Do you have to do certain things differently, add more new product, like acquisitions, whatnot? Is that is the landing spot that would be potentially very value accretive?

I think the number one thing, if you I look at it Zoom meeting is faster innovation cycle. We always innovate together with our customers. Quite often, you try the Zoom product versus any other competitor product. Very often we receive feedback. Why is Zoom is better? Because we spend more time than any of our competitors, right, to truly work together with customers and understand their pain point. And we come back and it's going to drive innovation and quickly deliver something to customers. I think that's our company DNA. That's the number one thing. Number two things really set up a long-term vision, not like, hey, this year, in 2 years, what do we want to achieve, we really set up a 5 to 10 years' vision, more like similar to when I started in 2011. I told our chief, "Hey, in 10 years, can we become a public company. Can we have reached $1 billion revenue"? We always set up a long-term vision, right? So for the time being, you look at, oh, why you are doing this? If you really think about it in the long run, a lot of things we are doing makes sense. When it comes to worker platform, you look at recently in every long-term Zoom Docs, quite often, and customers say, why do you -- why Zoom Docs.

Yes. What would you -- why Zoom build docs, yes.

Again, the Zoom Docs is not just another Word, another Google Docs. It's not like that. It's more than that. It's also can manage your knowledge base, can manage your -- the task and so on and so forth, right? And after meeting is over, and also can -- and be a matter of for you to put all the summaries, transcriptions, X number of items there as well, right? It's part of our worker platform vision. So that's the reason why. I think here at Zoom, any time when we make a decision, we always look at the customer perspective and also look at the long term as well.

And coming back to the ground environment that we're in today, we met, I think, early part of this year, and you are right to call stability in the demand environment. We're now in September, looking into next year, potentially. What is the demand environment looking like at this point in time?

I think compared to last year, I would see in fortune much better. And as we shared in the Q2 earnings call, you look at our online business, I think, very stabilized, right? You look at the churn number we shared at the Q2 earnings call, as it is great. And I think overall, and since the second half last year and to this year, a lot of companies invest a lot of money to AI. I think as for now, I would say, a lot of businesses has realized. The sort of phase 1 AI investment is over. We've got to look at how to monetize, how to leverage the AI infrastructure to build some applications, AI applications, where we can monetize, how to -- and also how to deploy those services who already invest into the AI. Take Zoom AI Companion, for example, we see a better adoption every month, every quarter. Those customers who tried our AI Companion experience really like it. So that means for business customers, I would say it's kind of AI will help us to drive adoption. At the same time, online business also stabilized. I think we're in a much better positioned now.

Got it. Just more, Eric, about the Companion product. What was the unmet market opportunity you saw? What are you trying to solve there? Why is this going to be a good successful product for the company?

Yes. Because first of all, as we shared at our Q2 earnings call, over 1.2 million accounts already enable AI Companion. Just recently, friend of mine, he work for Stanford, to me that, hey, Eric, our university just enabled AI Companion. I tried. It works so well. He is a doctor over there. And so AI Companion is kind of -- is the foundation for our AI first worker platform. We invest heavily into the AI Companion. For now, like, hey, after the meeting is over, you have a greater transcription, greater summary. I can use a AI Companion to compose my channel message. And also we also levered AI Companion to build AI agent as well, essentially look at all of our services, how to leverage AI Companion. It is a federated AI approach. That's the reason why I look at our Workplace platform. And guess what? It's what works so well and at no additional cost, right? I think how to build the AI first to worker platform, you have to have a very solid AI layer, differentiated AI layer. And that's why we are so excited. We hired our CTO and we [indiscernible] last year, we hired a lots of AI talents, I think we're very excited about that.

Tell us more about that. I'm not plan to ask it, but you've hired a lot of new talent, it looks like to build out the technology layer. What is the risk of getting a little bit too technical? I know you are an engineer, you were on the core team at Cisco Systems.

I'm still an engineer.

So you're still an engineer. You still write code.

Yes. I sort of go back and write code, all the questions.

So what does that AI look like? So we're trying to build that will put the company. So describe to us, if you don't mind, the platform and the applications in the new generative AI world for us.

Given [indiscernible] as of today, if you look at most of the obligations built today already built many years ago, right? There's no AI at that time. And today, if you look at AI, very likely just a sort of a little bit of fine-tuning your product experience, right? It's still like a product, let's say, we're still using the product built many years ago. So we levered AI to assist, right? That's today's user experience. When I talk about the AI-first platform, worker platform, it's more like we built a new solution with AI, of course, mainly you'll have the AI, you are the assistant to AI. AI will drive to get work done for us. And back to the slide, creation for the Board slide deck. AI will do all the work first. I just help to edit rather than today, look at today PowerPoint, right, you need to create a PowerPoint for us and leverage AI, it doesn't work, right? How to make sure -- change all the product philosophy, change all the usability philosophy, build AI-first solution, that's a new opportunity. It's very hard to take your existing system to rewrite, very similar to what we build at Zoom, right? I build web-based before. You really cannot take web apps to build a similar experience as Zoom does today. You have to rewrite every layer. So I think AI does bring the similar opportunity.

And so if this AI vision of yours comes to fruition, what else could Companion do? What else would Zoom do besides creating PowerPoint presentations, which is definitely a big source productivity savings? So if you are to reimagine the other capabilities and the killer applications that would be possible because of what you're building, what...

There are too many opportunities. I give you maybe a name or two, right? Today, as you look at the Contact Center, right? You look at the virtual agent, right? Quite often the way for Contact Center works, you have a human agent behind the scene, right, to serve the phone calls, website, the chat, and so on and so forth. Today, we have Zoom virtual agent, quite often, you do not need a human agent anymore, right? But in case you need a human agent man assist, what an agent can search for the knowledge base, search for the tickets and give a great answer about the problem, why you try to call us as for example. Another example, today, like when I open up a Zoom client and normally, I go to the chat tab, send a chat, a message, and occasionally I also missed some important emails. End of the day, every day, I do self reflection, try to say, hey, are there any important things I missed. I have to do hear, meaning every time you remember. Imagine, we have AI Companion, sitting within a Zoom client, we call that AI Companion agent, right? Every morning, we open up the Zoom client. I do not need to do anything. Agent will tell me, Eric, you missed the two important e-mails yesterday. One is from a Kash, you better send an e-mail response for Kash.

Thank you, AI.

Right. And same [indiscernible] me offer that, that's very important call, you need to join, right? And at the end of the day, and it will tell, it will give me a summary, and also, hey, you should now to send a chat a message to build a group of something, essentially more like many agents sitting next to me to help me manage, monitor all of those tasks.

And you're using this personally, every day?

Yes. Yes, that's the vision.

And what...

Today, I have exactly [indiscernible] add any, not every Zoom employees, they have that, right? And down the road, you can have multiple digital assistant to help you get to work done. I think that's a part of AI-first worker platform.

And the synergy would Zoom is that since you are the conduit for many meetings that are done, it had the content, it has the context of what is being discussed. So it can allow you to be a more effective user of AI because it's rich data comes to...

You are true, right on. today, look at the Zoom meeting, it's more like a just a real-time interaction tools, right after the meeting is over, our previous philosophy. After meeting is over, we don't have any data left there. For now, it's the meeting just a part of your system of action, right, premeeting, during meeting and the post meeting. Let's say you and I've a very important meeting. But now our meeting is over, unless someone took a notes, right? Otherwise, no one will remember what's going on after 3 months. Now the way it works with AI-first approach, after the meeting is over, with generative assist system of action, right? Essentially, anything we talk about that during the meeting time will be converted into action item. And Zoom AI agent will follow that. We automatically create a task for you, monitor the task, track the task, essentially meeting just a part of the entire business workflow with AI. Without AI, we really cannot do that because you cannot assume every meeting, you have to have an assistant, right, to write down the meeting minutes, write down the action items, it's not forgettable. With AI, it's scalable. That's the reason why we want to make sure that unified communication or collaboration as a part of an entire your business workflow, that's a system of actions.

Got it. Excellent. You would like to -- I'm sure we would all like to see the company grow faster. Are there any initiatives that you're undertaking to reaccelerate the top line growth rate for the company?

I think we -- first of all, we have to innovate, right? I think the number of things is really about innovation. We have to introduce multiple new services by take Zoom Docs, the contact center, we made a great progress and about the contact center. And we are going to introduce a lot of new services down the road as well. I think that's a really important innovation, number one thing. Number two things really think about how to build something in the AI -- back to AI first. Because again, you could argue, hey, there's so many contact center solution provided out there. Why you think you can win? Remember, those solutions were all built many years ago. Exactly. Today, how you lever the AI-first approach to build a new solution. That's really important. Always remember, usability need to be changed. All the new features, how to lever the AI to power all those new use cases is very important. You have the new solution, right, to lever the AI, to sort of disrupt all the existing solutions, that second thing. The third thing to really that accelerated our growth, we have to fix the internal problem, where you knew that, right? So we hired more than 6,000 employees over the past few years. I think it will take some time for us to get it back to our great culture. This is the second year for us to fix that broken culture. I think we're almost there. Because the reason why if you do not fix broken culture. Like this morning, one of our smaller customers they want to renew a webinar license. Guess what? They cannot find the right assist, account executive, right, to get a thing done on the same day. So if we do not fix that culture, I think everything will be slower.

That's something that Wall Street doesn't spend much time, but that's an important thing that you're on to. And in that discovery process, Eric, what are the things that you've decided you need to work on to fix that culture. What are the action items? And what are the mandates you've issued to your management team?

We had lots of initiatives over the past 12 months. Like our chief of staff, I keep her very busy. A lot of things. Like he used to be done very well, but now this is broken over the past 3 years, like a spend for control, right? The [ two men ] layers. We have to proactively reduce the layer, right? That's the number one thing, right? Number two thing, it's quite often because we had so many employees who work on the project together. We hired also some project managers or program managers. We used to -- we never have those rules, right? Those rules were created during COVID. We also needed to get rid of all those project managers as well and reduce the number of layers and get rid of all those project managers at the same time, at the same time make sure how to think about the productivity, right? It's kind of -- today, we support hybrid work. Employees only come to office twice a week, how to measure their productivity. It used to be very hard to measure productivity. Now we need to make sure all the managers very hands on back to [indiscernible] mentality. I'm not talking about the micro managers, but they all need to be very hands-on, really understand every hour, every day what our employees are doing. I think essentially back to early days of a startup mode. I think by doing that, I think -- it's not something new. We did that before, but you need to just go back to the day 1 startup mentality.

Got it. You talked about Contact Center. You have about 1,100 customers or so. And you also talked about how you want to reimagine the Contact Center for a Gen AI world where it's architect from the ground up with Gen AI. What is that? What does the new age contact center look like? What in your vision would an ideal customer that uses Gen AI Contact Center from Zoom? What are the -- they could do that they cannot do.

Yes, that's good question. You see we never talk to customers, right, no matter which on-prem contact center solution they deployed or the cloud contact center deployed. Today, every customer, no matter how many years they already deploy contact center, there's some new demand, new requirements. It's something new, right? Because AI, because a lot of other things. And we always want to work together with the vendor where they know they can trust. They can innovate it together. And also the standard of feedback of the vendor. We know the vendor can quickly address with the solution, right? Because you look at it today, even very fragmented, but quite often, it's very slow, right? And that's the reason why the customer, when look at Zoom, they know our track record is a fast innovation, is a trusted brand. They know we can innovate together. And this the reason why the customer would want to work together with us. Not to mention we have much better integration, not just to build the core engine of the Contact Center, we also have workforce management, quality management as well and a virtual agent and a very good integration with other collaboration and services as well, right? That's the reason why we're winning in this space. Fundamentally, if you talk to customers, you'll realize the point solution for contact center are very hard to survive. You have a build a platform. In the UC and CC, AI and also the entire contact center offering, you have to have everything.

And are you there in bringing everything together, do you still have more work to bring that UC, video, messaging, AI?

I think a foundation is already there, a very, very solid. Probably the missing some of corner features in some vertical industry in, let's say, health care industry, they need some special features and you need to add as well. But by and large, I think we are already there. That's the reason why we are making a very good progress.

Yes. Got it. The other one was Zoom Phone. Let's talk about Zoom Phone. We used to hear a lot. Give us an update on how Zoom Phone is doing and what are your aspirations for the product?

Yes, still doing well, We're still -- and have a high expectation, because believe it or not, today, a lot of companies, they're still using on-prem phone system.

We do.

Yes, that's the opportunity, right? So I think, in particular, for international market, SMB, in large enterprise, I think a lot of on-prem phone deployments. I think there's a huge opportunity for us. We did not talk about a lot because the new product Contact Center, a lot of other things we talk. But behind us, and the Zoom Phone is still doing well, I'm still seeing a lot of opportunity for us. As I mentioned, the partner solution will not survive well, including phone system as well. So.

Got it. Talk to us Eric, this is more of an operational question. Churn and some of the initiatives the company is undertaking internally. I know you talked about the culture and some of the processes that you're working on. So maybe that is part of this initiative. But how important is producing churn as an initiative within the company and what are things that you're putting in place?

It's extremely important because if you look at all of our E-staff meeting agenda, on the one hand, we focused on top line growth, on the other hand, how to reduce the churn. But to reduce the churn, you have to be patient. Because during the COVID, year-over-year growth with that 350%, is take a one of our big bank customers. They bought the Zoom license for all of their employees, including front desk staff, after COVID crisis over, I really do not seen that, it's sustainable, right? And plus it used to be during COVID, almost every family, they have a Zoom license. I mean they pay the license, right, like for the family reunion. For now, we can use some basic free services. We have Zoom basic. But you still -- you got the paid subscriber online business. I think it's still growing. Even some customers that canceled, but we do see some new customers. Exactly. So that's the reason why, I mean, as we add more and more value, and customers, especially paid subscribers realize, oh, Zoom does care about us because we may introduce the Zoom AI Companion. We did not charge to paid online subscribers. We give them for free. When we introduce Zoom Docs, we also give them for free. Essentially, we add more and more value to build trust, not like enterprise customers over the passing many years. We already established trust with enterprise customers. But all those online buyers, they were not using Zoom prior to COVID, right, how to build a trust with Zoom. The only way to build the trust now like in-person meeting a lot of -- lots of webinars, invited them to our EPC is not like that. And more value, care about them, deliver better service. Along the way, I think they will trust Zoom more and more similar to what we did, what we achieved to build trust with leadership in the enterprise customers.

Got it. I want to switch a little bit to financials. Your stock is very attractive. You've got a big cash balance. And some thing...

I do not think that's big, only $7 billion.

$7.5 billion, come on, Eric, you do a lot.

$17 billion is probably is better.

You do a lot of magic with $7.5 billion. But I'm curious to get your thoughts. This is something that you've heard from your investors, and I hear this that we talked about the innovation, the growth opportunities ahead. But in the very near term -- bless you. Have you not -- why would you not think about a more aggressive stock buyback program with the valuation multiple. Some would argue that you're the most attractively priced software franchise on the planet, maybe if not the first, second, third. So that would seem like the best. I remember Marc Benioff said that we decided to buy the most interesting company, the most valuable asset, which is our own stock, which was 2 years ago, the way he said it was just so catchy, right? So why would you not buy your own stock?

So by the way, we did, right, we did around $1.5 billion to buy back. Maybe let me take a step back, share with you our philosophy. Actually, when I started in 2011, right, we raised the capital from friends or investors. On day 1, our mantra was those are not money in the bank, those are the trust. Every dollar is a trust of investors they give to us, right? So mainly we take those cash very, very, very seriously, right? Because it's not -- it's even more important than my own money. Because on the one hand, you can't buy back. On the other hand, you can't maybe think about our long-term AI-first worker platform vision, right? Down the road, there's a lot of opportunity over there. If you already buy back, let's say, we have a very large strategic deals. We have a lot of great AI startup company. We have a lot of new initiatives, I mean, for -- to embrace AI-first, right? We want to be more aggressive to drive our growth. Buyback, I think is very important is to really take care of our shareholders' value. But I would say it's more like a reactive, not proactive. I'm not saying we should not do that. We should do that, but balance buybacks and also with enough cash give us flexibility and to fuel the future growth. I think that's been more important. Again, I just want to share with all the investors. We take all those investors' money. I mean the cash, right, very, very seriously. And it's even more important than we treat our own money. So that's the reason why we wanted to take a flexible long-term approach, yes. The cash will not be there forever. For sure, you will saw in some actions.

So have you -- what's your M&A philosophy? What are you looking for that could be accretive to Zoom's top line or bottom line or accretive, technologically speaking, enhances your vision or accelerate your vision? What are the things you do?

I think essentially, two things. On a high level, if you -- I just shared our vision, right, AI-first worker platform. So when it comes to M&A, either related to AI-first or related to worker platform. If you look at the worker platform, which part are missing? Look at AI first, anything...

It's giving us clues, we need to go figure out what are the 3 letter ticker symbols and 4 letter ticker.

Exactly. So AI-first or the worker platform. I think and you would see in some new deals, and down the road. Because we cannot build everything organically. That's one thing. Another thing also I want to make sure the culture fit, right, if you hire a company, even hire groups, the culture does not fit. It still -- even cause more problems down the road.

That's true. Anybody wants to jump into questions. Matt Martino. I volunteer Matt Martino and my team to ask it. And he's shaking his head vigorously. Like I'm going to ignore that. No, no, no. Anybody question? Yes, please. If you can bring the mic over. Okay. Great. Thank you.

So you have such an amazing product, and it's you so ubiquitously. What do you think the public market doesn't understand about your story?

[indiscernible]

What is the -- is Zoom is a ubiquitous if I can paraphrase your question. Well known. What does the public market not get about Zoom, public investors?

I think a few things. One thing is I really understand our long-term vision in order just the short term, and I quite often say, "Oh, Zoom is just focused on the unified communication or contact center". It's not only what we are doing today. I want to target investors really understand our long-term vision, that number one thing. Number two things, really understand is kind of need of the hour, competitive position as well, quite often some investors say, oh, your competitor have a sort of something for free, they are going to eat your lunch. That's not like that. The reason why not only do our customers like our product, our competitor customers also like our product. Quite often, I send them a Zoom link to our competitors -- the customers because they were forced to use our competitor product. But they all mentioned is Zoom product much better. And that's a lot of public investors sort of do not understand that. I think down the road why economy is getting a little bit better. I mean the companies, they focus on employee experience rather than just sort of cost. If you look at the total cost of ownership, Zoom also is much better, right, in terms of supportive cost, AI cost, right? I think one of the public investors understand that Zoom in terms of product positioning is much better than any of our competitors. I think those two things.

Yes, it's -- yes, please go ahead. There's another question.

Philosophy on stock-based comp has changed at all. And if you'd consider paying more cash instead of stock today, just given the attractiveness of your stock. Curious if your stock-based compensation philosophy has changed, would you consider paying cash in lieu of stock to some degree, right?

I should serve our [indiscernible] slide deck, we just discussed recently. You also write down, and we completely changed. I think we during the COVID, given the stock price were too high, we have the equity program to reward our employees. I think looking back that's a mistake. We already corrected that a mistake, we already fixed that. That's -- we really -- and put a lot of efforts on that to fix this problem. I think I can tell you the problem already fixed. So, yes.

What was the answer you were expecting to hear?

I can invite you to join our next [indiscernible] meeting about this product. So seriously, we take it very, very seriously. [indiscernible] fixed.

Yes. That's great. So in the final minute or so that we have, what are you looking for in Kelly's replacement?

Where's Kelly? But anyway, I'm appreciative for Kelly's greater job, right? And she joined us 2 years before IPO and I knew her for many, many years. And -- fantastic work here. And essentially, with Kelly's greater health, we grew our winning sort of from 0 to 1, right, given the Kelly's passion back to the start-up, and...

You didn't tell or you plan to be a much larger company than that. She's like a [indiscernible] [ $4 billion in ] revenue and say, what have you done?

Yes. I think next round, next CFO has really help us to 1 to 5 or 1 to 10, right, with a greater background on how to scale our company, right? And Yes. Yes, I think it is more like a 2.0 journey.

Yes. Great. With that, any -- there's one more question. 30 seconds you have.

I just wanted to follow up. So would love to be able to double-click at some point into what that road map looks like because you're speaking at very high-level generalities and you clearly have very specific vision in mind but would love to be able to actually see what that means like from an articulation standpoint. And then when you spoke -- so that's one thing. The second is you spoke about competition, but in reality, you've kind of kicked everybody out except maybe Microsoft, right? I mean WebEx isn't, in my mind, a real competitor. Skype no longer is. You're competing against Teams, right? So I would love to hear what your thoughts are against that.

Yes. It's two great questions. Down the road, maybe you have with us some more time. We have a product road map. Like this morning, a group of CEOs from Japan, they're visiting us. We share our product road map, right? So we have three key pillars, right? Workplace, road map, being in the service roadmap and AI road map, right? Those three things together create our AI-first worker platform. Back to a Microsoft actually, I did not share at an earnings call like the last quarter, one of the customers. It's not a small customer. It's a $1 million ARR customer. His job at the Teams, they switch to the Zoom platform. Because we also have a build in the Teams chat solution. Unfortunately, we did not market it well, is shame on us. I mean customers realized, well, you also have a Teams chat, you have everything, why not standardize on your solution. Because the product much better, they employee happier. This never happening before. Last quarter, one company they did that. I do think given some time and the customer realized we are much better positioned. Because we virtually care the customer and the product is much better. You bundle everything together is sort of free. Guess what? The total cost of ownership is not free. So -- and we've got to tell a better story, and we did not do good. We did not do well on that front. So we got to fix that as well.

Thank you so much. We heard a lot about AI fundamentally the architecture.

AI first.

Yes. AI first.

Worker platform.

Worker platform. We talked a lot about the cultural alignment and the operational efficiencies you're looking to on Earth, and we talked a lot about your aspirations to reaccelerate growth, your balanced approach to buying back stock versus investing in innovation buying companies. And what you're looking for in your CFO, I think I got maybe half of that list. It matches. I got everything right.

Yes. We want to deliver happiness to our investors. So that's next step.

That's a next step. Well, Eric, thank you so much for joining us once again. Always special to have you.

Thank you again.

Thank you.